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Terminating a SEP using a 5305 Model SEP form


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The question is - if an employer using a 5305 model SEP hasn't contributed for the last three years, and hasn't contributed anything this year, can the employer establish a 401(k) for this year? IRS instruction doesn't truly address this.

Terminating a SEP Plan

Do I need to amend my SEP for the new law before I terminate it?

Generally, the IRS has not required employers to amend their SEPs for new law prior to termination. Check with your plan professional.

Do I have to fund my SEP in the year of termination?

SEPs can be terminated at any time. You can stop funding your plan once it is terminated.

What are the notification requirements when a SEP terminates?

When you terminate your SEP plan, it is a good idea to notify the employees that you are discontinuing the plan. You may need to notify the financial institution that you chose to handle the plan that there will be no more contributions and that you will terminate the contract or agreement with it. Do not notify the IRS of the plan's termination.

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2 hours ago, Belgarath said:

can the employer establish a 401(k) for this year?

Sure. (I think) it is pretty clear that the prohibition on having a 5305 model SEP and another plan relates to contributions, not the mere existence of a document. It's just about 415 limits (again "I think").

Three is absolutely no audit circumstance under which the mere existence of a model SEP is discoverable (not that that makes it ok, but it kind of proves the point about why it might be a problem - limits, and, I suppose, testing).

Ed Snyder

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